MACROECONOMIC EXAM GENERAL NOTES
OCTOBER, 2020
1. Demand and Unemployment
o As demand falls, Unemployment Rise
Changes in the economy’s output of goods and services are strongly
correlated with changes in the economy’s utilization of its labor force. In other
words, when real GDP declines, the rate of unemployment rises. This fact is
hardly surprising: When firms choose to produce a smaller quantity of goods and
services, they lay off workers, expanding the pool of unemployed.
2. AE formula and GDP
o Aggregate Expenditure
In economics, aggregate expenditure is the current value of all the
finished goods and services in the economy. It is the sum of all the expenditures
undertaken in the economy by the factors during a specific time period. The
aggregate expenditure determines the total amount that firms and households
plan to spend on goods and services at each level of income.
The equation for aggregate expenditure is: AE = C + I + G + NX.
• Consumption (C): The household consumption over a period of time.
• Investment (I): The amount of expenditure towards the capital goods.
• Government expenditure (G): The amount of spending by federal, state, and local
governments. Government expenditure can include infrastructure or transfers
which increase the total expenditure in the economy.
• Net exports (NX): Total exports minus the total imports.
, o GDP
The aggregate expenditure is one of the methods that is used to calculate
the total sum of all the economic activities in an economy, also known as the
gross domestic product (GDP). The gross domestic product is important because
it measures the growth of the economy. The GDP is calculated using the
Aggregate Expenditures Model.
An economy is at equilibrium when aggregate expenditure is equal to the
aggregate supply (production) in the economy. The economy is not in a constant
state of equilibrium. Instead, the aggregate expenditure and aggregate supply
adjust each other toward equilibrium.
When there is excess supply over the expenditure, there is a reduction in
either the prices or the quantity of the output which reduces the total output
(GDP) of the economy.
In contrast, when there is an excess of expenditure over supply, there is
excess demand which leads to an increase in prices or output (higher GDP). A
rise in the aggregate expenditure pushes the economy towards a higher
equilibrium and a higher potential of the GDP.
3. Economic Cost and GDP
- High rates of GDP growth can bring about undesirable economic and social costs,
depends on the nature of the growth.
o Risk of higher inflation and higher interest rates
- Fast- growing demand can lead to demand-pull and cost-push inflation this leads
to a conflict between macro objectives.
- The central bank may decide to raise interest rates to control inflation.
o Environmental effect
- Fast growth can create negative externalities such as noise pollution and lower
air quality arising from air pollution and road congestion.
- Increase consumption of de-merit goods which damage social welfare
OCTOBER, 2020
1. Demand and Unemployment
o As demand falls, Unemployment Rise
Changes in the economy’s output of goods and services are strongly
correlated with changes in the economy’s utilization of its labor force. In other
words, when real GDP declines, the rate of unemployment rises. This fact is
hardly surprising: When firms choose to produce a smaller quantity of goods and
services, they lay off workers, expanding the pool of unemployed.
2. AE formula and GDP
o Aggregate Expenditure
In economics, aggregate expenditure is the current value of all the
finished goods and services in the economy. It is the sum of all the expenditures
undertaken in the economy by the factors during a specific time period. The
aggregate expenditure determines the total amount that firms and households
plan to spend on goods and services at each level of income.
The equation for aggregate expenditure is: AE = C + I + G + NX.
• Consumption (C): The household consumption over a period of time.
• Investment (I): The amount of expenditure towards the capital goods.
• Government expenditure (G): The amount of spending by federal, state, and local
governments. Government expenditure can include infrastructure or transfers
which increase the total expenditure in the economy.
• Net exports (NX): Total exports minus the total imports.
, o GDP
The aggregate expenditure is one of the methods that is used to calculate
the total sum of all the economic activities in an economy, also known as the
gross domestic product (GDP). The gross domestic product is important because
it measures the growth of the economy. The GDP is calculated using the
Aggregate Expenditures Model.
An economy is at equilibrium when aggregate expenditure is equal to the
aggregate supply (production) in the economy. The economy is not in a constant
state of equilibrium. Instead, the aggregate expenditure and aggregate supply
adjust each other toward equilibrium.
When there is excess supply over the expenditure, there is a reduction in
either the prices or the quantity of the output which reduces the total output
(GDP) of the economy.
In contrast, when there is an excess of expenditure over supply, there is
excess demand which leads to an increase in prices or output (higher GDP). A
rise in the aggregate expenditure pushes the economy towards a higher
equilibrium and a higher potential of the GDP.
3. Economic Cost and GDP
- High rates of GDP growth can bring about undesirable economic and social costs,
depends on the nature of the growth.
o Risk of higher inflation and higher interest rates
- Fast- growing demand can lead to demand-pull and cost-push inflation this leads
to a conflict between macro objectives.
- The central bank may decide to raise interest rates to control inflation.
o Environmental effect
- Fast growth can create negative externalities such as noise pollution and lower
air quality arising from air pollution and road congestion.
- Increase consumption of de-merit goods which damage social welfare
